Active Israeli Mutual Funds Outperform TA-125 Index Amid Market Rally
Active mutual fund managers in Israel have long faced skepticism due to their difficulty in consistently outperforming stock indices, especially after accounting for their relatively high management fees of 1.5% to 2.5% annually. This perception has driven many investors toward passive investment vehicles like index funds and ETFs. However, recent years have shown a more nuanced picture, as the sharp rally in the Tel Aviv Stock Exchange and significant sector disparities have made stock and sector selection more critical, allowing some active managers to generate excess returns.
Over the past three years, the TA-125 index surged by 124.7%, with a 97.8% gain in the last two years alone. Yet, sector performance varied widely, with the TA-Finance index soaring 225% while the TA-Real Estate index returned less than 70%. This divergence highlights the importance of active management in navigating sectoral shifts. The Israeli equity mutual fund sector currently includes 358 funds managing 166 billion shekels, making it one of the largest segments within the 835 billion shekel mutual fund industry.
Performance analysis of funds focused on TA-125 stocks reveals that in the short term, a majority of active funds outperform the index: 57.8% over one year and 62.5% over the last 12 months. Over two and three years, 56% and 61.5% of funds respectively beat the benchmark. However, over a five-year horizon, only 48% of funds managed to outperform, reflecting the challenge of consistent long-term outperformance amid volatile market conditions including the 2021 rally, 2022 rate hikes and geopolitical tensions, and the 2023 Iron Swords conflict.
The top-performing fund over five years was Tamir Fishman Equities, with a cumulative return near 207%, managing nearly 3 billion shekels and holding a concentrated portfolio of 46 stocks. In contrast, Altshuler Shaham Sufa Equities returned 77% over the same period, with a more diversified portfolio of 65 stocks and significant holdings in major banks. Meitav Tachlit Mutual Funds CEO Lior Kagan emphasized that the notion active funds cannot beat indices no longer reflects reality, citing local market familiarity and close company relationships as key advantages. Industry experts also note that distortions in index updates and market concentration in Israel create opportunities for skilled active managers to exploit inefficiencies and outperform benchmarks consistently.
